SHARED SERVICES

Shared services is an operational philosophy that involves centralizing
administrative functions that were once performed in separate divisions or
locations. Services that can be shared among the various business units of
a company include finance, purchasing, inventory, payroll, hiring, and
information technology. For example, a central headquarters might control
all the hiring for an entire chain of retail stores. The term
"shared services" can also apply to partnerships formed
between separate businesses. For example, the tenants of an office
building might share telecommunications or maintenance service. Shared
services are also available on the Internet. For example, Application
Service Providers (ASPs) offer numerous business clients access to online
applications so they can avoid purchasing special systems and software.

Ideally, companies that implement shared services enjoy significant cost
savings by standardizing practices and procedures and by creating
economies of scale. Proponents argue that performing a function in one
location usually requires less investment in technology and office space,
as well as up to 30 percent fewer employees, than performing the function
in multiple locations. "Under shared services, a company
centralizes back-office functions, such as accounting, warehousing, and
even information technology, and treats them as internal vendors,"
Erik Sherman explained in
Computerworld.
"The rest of the company can use outside service providers
instead, so competitive pressures promote responsive service, and reduced
staffing saves money." In some cases, the centralized
functions—or shared services organizations—charge the
different divisions for the use of their services. Other shared services
organizations even offer their services to outside firms on the open
market.

Shared services is a popular business strategy. In fact, Elizabeth
Ferrarini noted in
Computerworld
that it has been adopted by half of all Fortune 500 companies.
"Centralizing company functions—in a manner now known as the
'shared services' model—is one of the hottest trends
in business today," Mark Henricks wrote in
Entrepreneur.
"Those who practice it say they can cut costs while improving the
quality of the services shared." The concept of shared services was
introduced in the 1980s, when a number of large companies with multiple
business units began looking for ways to reduce their administrative
costs. Since then, Henricks noted, "Shared services has evolved
into a more comprehensive and flexible tool for improving processes,
enabling technology investment, generating profits, and reducing
costs."

There are a number of potential drawbacks associated with shared services,
however. For example, companies switching to a shared services model often
incur the cost of hiring new people and installing new technology. In
addition, implementing shared services takes time—often more than
one year. Furthermore, as Henricks warned, centralization is not
appropriate for every function. Companies should not centralize their core
competencies or functions that involve direct customer contact,
particularly if outside firms also use the shared services.

The implementation of shared services can also create problems within a
company. For example, the employees who used to provide the services in
various business units might be upset with the loss of control they
experience under the new arrangement. In addition, the headquarters
employees who provide shared services from a central location might be
uncomfortable treating business units as customers. In fact, switching to
a shared services environment requires employees to develop new skills,
with an increased emphasis on flexibility and customer service. "To
be the preferred supplier—and even to have a secure corporate
existence—the shared service has to cost effectively deliver
superior results," Sherman stated. As a result, shared services is
not appropriate for every business. "For many companies, shared
services will remain an intriguing concept that just doesn't fit
their needs," Henricks noted. "For others, it will represent
exactly the right model to take advantage of a promising opportunity to
make the most of home-office skills that other divisions, locations, and
even other companies can also use."